These guidelines issued under article 75(2) of the Value
Added Tax Act (Chapter 406, Laws of Malta), hereinafter referred to
as the "Act", set out the Commissioner for Revenue's
(CfR) position on the VAT treatment of transactions concerning
activities involving Distributed Ledger Technology (DLT) assets.
For the avoidance of doubt, these guidelines do not cover
electronic money that is representative of fiat currency. These
guidelines are applicable solely to the purposes of the Act
(including any rules or regulations issued thereunder) and have no
bearing on any other law.

A. Types of DLT Assets for Vat Purposes

For the purposes of these Guidelines, DLT assets are categorised
as follows:

Coins

This category refers to DLT assets designed solely as a means of
payment, do not have any of the characteristics of a security, have
no connection with any project or equity in the issuer, and whose
utility, value or application is in no way directly related to the
redemption of goods or services. These are cryptocurrencies that
are designed to be used as a means of payment or medium of
exchange, or function as a store of value: functionally they
constitute the cryptographic equivalent of fiat currencies and are
meant to serve as an alternative to legal tender.

Tokens

a) Financial tokens
This category refers to DLT Assets exhibiting qualities that are
similar to equities, debentures, units in collective investment
schemes, or derivatives and including Financial Instruments.
Generally, they might be known as security, asset or asset backed
tokens. These tokens would be analogous to equities, debentures,
units in collective investment schemes, or derivatives, where they
grant rights to dividends in a similar fashion as equities/shares,
or to interest payments like bonds, or to payments from units in
collective investment schemes, or payments linked with the
performance of a specific asset like derivatives, respectively.
Alternatively, they could grant rewards based on performance, or
voting rights, or represent ownership in assets, or rights secured
by an asset as in asset-backed tokens, or a combination of the
foregoing.

Utility tokens
This category refers to DLT Assets whose utility, value or
application is restricted solely to the acquisition of goods or
services either solely within the DLT platform on, or in relation
to which they are issued or within a limited network of DLT
platforms. This category also includes all other DLT Assets that
are tokens whose utility is restricted solely to the acquisition of
goods or services, i.e. whether or not listed on any DLT exchange,
may be transferred on a peer to peer basis, or may be converted
into another type of DLT Asset but only until such time as it is so
converted. They do not have any connection with the equity of the
issuer and do not have the characteristics of a security.

It may also be possible for tokens to contain the features of
both financial and utility tokens, depending on the terms and
conditions of the said tokens, such that in practice they are
referred to as 'hybrids'.

Where a hybrid token is used in a particular case as a utility
token then it is to be treated as such, while if in another
occasion the same token is used as a coin, then it needs to be
treated as such.

Ultimately the tax treatment of transactions concerning any type
of DLT asset will not necessarily be determined by its
categorisation, but will depend on the purpose for and context in
which the transaction is made according to the Act.

B. General Approach to VAT treatment

The tax treatment of any transaction involving DLT assets shall
be in accordance to existing provisions, jurisprudence and
principles. Transactions that are subject to VAT need to be
analysed in the same way as any other transaction, i.e. by
reference to the nature of the activities, the status of the
parties and the specific facts and circumstances of the particular
case. Accordingly, the CfR shall apply the rules and principles
applicable in terms of the VAT Act (Chapter 406, Laws of Malta),
the EU VAT Directive (2006/112/EC) and relevant regulations and any
relevant case-law of the Court of Justice of the European Union
(CJEU), applicable according to the specific transactions.

Place of supply

For VAT purposes, before any tax is applied, the place of supply
of the good or service being made must always be considered. Where
according to the rules the place of supply is not in Malta, the
rules of the other relevant jurisdiction would apply.

In this regard, in the case of supplies of electronically
supplied services rendered to non-taxable customers established in
other Member States, being services taking place where the customer
is established and where the reverse charge mechanism is not
applicable, the supplier may opt to register and account for VAT of
the other Member State under the Mini-One-Stop-Shop system (MOSS)
in terms of Part Eight of the 14th Schedule to the VAT Act.

1. Treatment of COINS

In terms of relevant case-law of the CJEU (C-264/14 –
Skatterverket vs David Hedqvist), the court has ruled that
instruments whose purpose is none other than to serve as means of
payment accepted by certain operators must, for VAT purposes be
treated like traditional currency used as legal tender.
Accordingly, the exemptions provided for transactions in currency
and related services in terms item 3(4), Part Two, 5th Schedule to
the VAT Act would likewise apply to "transactions,
including negotiation" in cryptocurrencies where these
have as their sole purpose to serve as a means of payment as an
alternative to legal tender. The exchange of cryptocurrencies for
other cryptocurrencies or for fiat money where such exchange
constitutes a supply of services for consideration would be covered
by said exemptions.

Value

A coin's value may be determined by reference to the rate
established by the relevant Maltese authority, and where such is
not available by reference to the average quoted price on three
reputable exchanges, on the date of the relevant transaction or
event, or such other methodology to the satisfaction of the
CfR.

Digital Wallets

Where digital wallet providers require the payment of fees for
allowing coin users to hold and operate a cryptocurrency and create
rights and obligations in relation to the means of payment, in so
far as such cryptocurrency qualifies as currency for VAT purposes,
such services would be exempt without credit under the provisions
for transactions in currency and related services in terms of item
3(4), Part Two, 5th Schedule to the VAT Act.

Where on the other hand, the services of digital wallet
providers do not constitute transactions concerning currency as
above described, and where they cannot be regarded as transactions
concerning payments or transfers for the purposes of item 3(3),
Part Two, 5th Schedule to the VAT Act, or transactions in
securities for the purposes of item 3(5), Part Two, 5th Schedule to
the VAT Act, then the services would classify as taxable. For
avoidance of doubt, a mere technological service would be
taxable.

Mining

For the purposes of VAT a chargeable event would arise where a
supply of services is made for a consideration by a taxable person
acting as such. Moreover, as established by case-law, there must be
a direct link between the consideration payable and the supply
made, and where, there is a reciprocal performance between the
supplier and the recipient of the services.

Accordingly, where constituting a service for which compensation
arises in the nature of newly minted coins, mining normally does
not have a particular recipient of such service thereby, in that
case, falling outside the scope of VAT since there would be no
direct link between the compensation received and the service
rendered and, there would be no reciprocal performance between a
supplier and a receiver.

On the other hand, should miners receive payment for other
activities, such as for the provision of services in connection
with the verification of a specific transaction for which a
specific charge to a specific customer is made, a chargeable event
for VAT purposes would be triggered. In that case, in so far that
such service would be deemed to take place in Malta, Maltese VAT
would be applicable at the standard rate.

Exchange platforms

These are online platforms which facilitate peer-to-peer trading
or exchange of DLT Assets, whether such transactions involve the
exchange of Virtual Currencies with fiat, the exchange of Virtual
Currencies for other virtual currencies or the exchange/sale of
tokens.

The provision of a trading/exchange facility in consideration
for the payment of a user/transaction fee or commission constitutes
a supply of services for consideration. In principle, a supply of
services falling within the scope of Malta VAT would be taxable,
unless an exemption applies. The VAT treatment (as taxable or
exempt) of trading/exchange platform services would depend on the
nature of the service supplied, which would have to be determined
on a case-by-case basis.

In so far as the platform's
services involves the provision of an electronic facility whereby
holders of DLT Assets can trade/exchange, i.e. a technological
service that enables and is a component of the execution of a
transaction in DLT Assets by the holders/users, then such services
should in principle be regarded as taxable.

However, where the DLT Assets being
traded classify as "currency" or "securities"
for VAT purposes and where the platform's services go beyond
the mere provision of a trading facility, with an increased level
of involvement in the transfer or exchange, such services may
potentially fall within the exemption for:

transactions concerning currency
(item 3(4), Part Two, 5th Schedule, VAT Act - where the functions
of the trading platform are similar to those performed by a
traditional currencies exchange such as buying and selling
currencies); or

transactions in securities (item
3(5), Part Two, 5th Schedule, VAT Act – where the functions
of the trading platform are similar to those performed by a
traditional securities broker such as buying and selling Security
tokens); or

intermediation/negotiation in
connection with (i) transactions concerning currency or (ii)
transactions concerning securities. In both scenarios, the
following principles apply to the assessment of the VAT
treatment:

The term
'negotiation' in item 3, Part Two, 5th Schedule,
VAT Act refers to the activity of an intermediary who does not
occupy the position of any party to a contract relating to a
financial product, and whose activity amounts to something other
than the provision of contractual services typically undertaken by
the parties to such contracts.

Negotiation is a service rendered to,
and remunerated by a contractual party as a distinct act of
mediation. It may consist, amongst other things, in pointing out
suitable opportunities for the conclusion of such a contract,
making contact with another party or negotiating, in the name of
and on behalf of a client, the detail of the payments to be made by
either side, etc. The purpose of negotiation is therefore to do all
that is necessary in order for two parties to enter into a
contract, without the negotiator having any interest of his own in
the terms of the contract.

2. Treatment of TOKENS

a) Financial Tokens

It is critical to analyse what an investor receives in exchange
for financial tokens. Given that financial tokens could give rise
to dividends, interest payments or other rights, one needs to
examine whether such instruments would fall within scope of VAT in
the first place and where such would be the case, whether they
would qualify for the exemptions provided for under item 3, Part
Two, 5th Schedule to the VAT Act: Credit, banking and other
services, as 'security transactions', that is,
"transactions, including negotiation, excluding management
and safekeeping, in shares, interest in companies or associations,
debentures and other securities, excluding documents establishing
title to goods".

Where a financial token is issued simply to raise capital the
issue would not give rise to VAT implications in the hands of the
issuer, because the raising of finance does not constitute a supply
of services or goods for consideration and falls outside scope of
VAT.

Services supplied by exchange platforms to buyers and sellers of
financial tokens would have VAT implications as explained above
under the heading "Coins - Exchange
Platforms".

b) Utility Tokens

Where a token issued against consideration carries an obligation
to be accepted as consideration or part consideration for a supply
of goods or services and where the goods or services to be supplied
or the identity of the supplier is known, such token would have the
characteristics of a voucher and would have to be treated in terms
of Part Nine of the 14th Schedule to the VAT Act. The consideration
paid for a utility token to the issuer shall be deemed to be gross
of VAT due (if any).

Single-purpose Voucher (SPV)

Where a voucher represents an underlying good or service the
place of supply of which and the VAT due (if any) are known at the
time of issue of the voucher, the consideration payable for that
voucher would represent a payment for the supply of the underlying
good or service to which the voucher relates and would accordingly
create a tax point in terms of the 4th Schedule to the Act.
Accordingly, consideration payable to a taxable person for the
issuance and transfer of an SPV representing taxable supplies of
goods or services taking place in Malta would be immediately
subject to Maltese VAT in terms of the 4th Schedule to the VAT Act
and Part Nine of the 14th Schedule to the VAT Act.

Multi-purpose Voucher (MPV)

In the case of a voucher which is not a single-purpose voucher,
i.e. the place of supply and the VAT due on the underlying good or
service is not known at the time of the issue of the voucher, this
would amount to a multi-purpose voucher. VAT (if any) on the
MPV's underlying goods or services would be due at the time of
the redemption of the voucher.

3. Treatment of Initial Offerings

As already referred to above, under general VAT rules, a
chargeable event would arise where a supply of goods or services is
made for a consideration by a taxable person acting as such. Also,
as established by case-law, there must be a direct link between the
consideration payable and the supply made, and where, there is a
reciprocal performance between the supplier and the recipient of
the good or service.

Accordingly, where in the case of certain Initial Coin Offerings
(ICO's) or token generation events, investors place their money
at the ICO stage against tokens that are issued as a means of
collecting funds for the development of a future project, such
initial offering may not necessarily constitute a chargeable event
for VAT purposes. It may be that at such point, no specific good or
service is identified, nor a corresponding price for a supply could
be fixed, nor would it be possible to determine whether the project
undertaken would be realised whereby the investors could receive a
return. Such transactions would be out of scope of VAT. Similarly,
there would be no transaction in the scope of VAT if the money
placed by the investor would serve to acquire a security (equity,
debenture, etc.) in the issuer.

Where, on the other hand, the tokens issued would give rights to
identified goods or services for a specified consideration a
chargeable event for VAT purposes could arise and its proper VAT
treatment would have to be examined in that context such as in the
case of utility tokens, etc.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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